In the wake of the 2008 global financial crisis, stewardship codes emerged as a means for addressing the perceived shortcomings in the governance of public companies (Puchniak, 2024). While these codes vary across jurisdictions, they generally encourage informed voting by institutional investors and promote constructive engagement with portfolio companies. First introduced in the United Kingdom in 2010, stewardship codes have since proliferated across the globe, with 19 jurisdictions adopting them. But do these codes actually influence how institutional investors engage with their portfolio companies? Our research provides the first comprehensive empirical evidence on how stewardship codes have affected shareholder voting behavior in public companies across multiple jurisdictions.

Emergence and Purpose of Stewardship Codes

The rise of stewardship codes coincided with growing concerns about the efficacy of institutional investors’ role in promoting responsible oversight and governance of the companies in which they invest, particularly in light of the increasing prevalence of passive investing. Policymakers and corporate governance experts worried that the lack of effective oversight by investors had contributed to the failures of management that led to the financial crisis. To address these challenges, stewardship codes were developed as a potential solution, with the U.K. and Japan emerging as early adopters with distinct approaches (Goto, 2019). The U.K. code focused on curbing risks associated with short-termism and making institutional investors more responsive to public concerns, while the Japan code emphasized shareholder rights. Despite their differences, both codes shared the goal of encouraging institutional investors to take a more active role in corporate governance, promoting informed exercise of voting rights and constructive engagement with investee companies.

Impact on Shareholder Voting

Analyzing data from nine jurisdictions that adopted stewardship codes between 2014 and 2017, we find that the codes’ impact was nuanced. While they did not significantly change overall voting patterns, the codes had a notable effect on companies with few U.S. institutional investors. In these firms, the adoption of stewardship codes was associated with an increased propensity for shareholders to vote against management in contested situations.

Importantly, this effect appears to be driven primarily by U.S. institutional investors rather than local investors. Our evidence suggests that stewardship codes led U.S. investors to invest in more companies located where such codes had been adopted, bringing with them their voting practices and greater willingness to oppose management.

The “Halo Effect” of Stewardship Codes

Our findings support the “halo signaling” hypothesis posited by Puchniak (2024): Jurisdictions may be adopting stewardship codes to demonstrate their commitment to international corporate governance standards and attract foreign investors. Our finding that U.S. investors affected shareholder voting by broadening their investment portfolios to include more firms in jurisdictions with stewardship codes suggests that U.S. investors view the adoption of the codes as a positive signal, potentially anticipating more shareholder-friendly regulations in these markets.

More broadly, our results reveal a significant role played by U.S. institutional investors in spreading the effects of stewardship codes globally. They also highlight the complex interplay between global governance standards and local practices. The impact of Western corporate governance norms on  local practices is not necessarily direct but often mediated through the actions of global investors who increase their presence and engagement in adopting jurisdictions.

Implications for Corporate Governance

Our findings shed important light on the global diffusion of governance standards. The evidence suggests that these codes signal to global investors the level of a jurisdiction’s commitment to international governance standards, facilitating a form of cross-border transmission of governance practices through the attraction of foreign institutional investors. As the world continues to grapple with questions of effective corporate governance and investor stewardship, understanding these dynamics will be crucial for all stakeholders in the global financial system.

REFERENCES

Goto, G. (2019). The Logic and Limits of Stewardship Codes: The Case of Japan. Berkeley Business Law Journal 15 (2), 365-408.

Puchniak, D. W. (2024). The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit. American Journal of Comparative Law, 72(1), 109–169.

This post comes to us from Trang Nguyen and Charles C.Y. Wang at Harvard Business School. It is based on their recent paper, “Stewardship Codes and Shareholder Voting on Contested Ballot Measures,” available here.